The Costa Rican government is facing a complex scenario, since by not achieving consensus to access international loans, it will be forced to seek domestic funding sources, which would put pressure on the exchange rate and interest rates to rise.
The economic crisis that the country is going through due to the outbreak of covid-19 ended up sharpening the country's fiscal situation.
During 2019, the price of the dollar in Costa Rica registered multiple fluctuations; however, for this 2020, such abrupt variations are not anticipated, since the Central Bank starts the year with reserves close to $9 billion.
Data from the Central Bank of Costa Rica (BCCR) show that between February 4 and November 28, 2019, the average dollar price in the Costa Rican market fluctuated considerably, ranging from ₡614.31 to ₡562.63.
In Costa Rica, it is expected that the downward trend that has been showing the exchange rate since February will intensify in the coming months, when the $3.580 million begins to enter as a result of the issuance of Eurobonds and loans granted by external entities.
According to data from the Central Bank of Costa Rica (BCCR), between the beginning of February and July 30 of this year, there has been a fall of up to 44 colones per dollar, reporting a drop in the average rate in the wholesale market Monex from ¢613.87 to ¢570.13.
In a competitive scenario for lower costs and higher productivity, devaluation against the Lempira Dollar in Honduras and the Cordoba Dollar in Nicaragua is a factor that could help these economies stay competitive.
In the last five years, the exchange rate in Honduras increased by 17%, from 21.06 Lempiras per U.S. dollar in June 2014 to 24.67 in the same month in 2019.
After Costa Rica's Constitutional Chamber prepared the path for tax reform in the Congress, the dollar's price against the local currency stopped rising, and positive reactions were reported in the risk outlook.
Last November 23rd, Court IV issued its judgment, so the law project has a free way to move forward more quickly during the coming weeks in the Congress.
With the purpose of "reducing pressures in the exchange market," the Central Bank of Costa Rica increased the interest rates of its term deposits as of November 7th.
With this increase in the interest rates of the Central Bank's deposit instruments, which is added to the one made last week, the entity seeks to foster savings in colones, particularly in instruments with longer terms.
The upward trend in recent weeks in the dollar's price against the Colon has slowed.
According to figures from the Central Bank (BCCR), the exchange rate on the Monex wholesale market increased between August 17th and October 11th, from ¢568.35 to ¢597.43 per dollar, equivalent to a depreciation of 5.12%.
However, the constant depreciation registered by the Colon started to be contained at the end of last week, since on October 12th the weighted average in the Monex wholesale market was ¢595.41. The BCCR reported yesterday that the exchange rate dropped to ¢594.56 and today to ¢594.24.
During this year, the Central Bank of Costa Rica has had to spend $1.1 billion of its reserves to participate in the exchange market and counteract the upward trend in the dollar price with respect to the Colon.
According to figures from the Central Bank of Costa Rica (BCCR), from August 17 to October 12 the exchange rate in the wholesale market Monex has been increasing, going from ¢568.35 to ¢595.46 per dollar, which is equivalent to a depreciation of 4.76%. [GRAFICA caption="Click to interact with the graph"]
Even though the Central Bank of Costa Rica intervened yesterday selling $31 million in the foreign exchange market, at the end of the day the exchange rate in the Monex market stood at ¢585.8 per dollar.
According to figures from the Central Bank of Costa Rica, between September 25 and 26 the weighted average exchange rate in Monex rose from ¢579.54 to ¢581.76.This depreciation came a day after the government announced that with a "loan" of $866 million from the Central Bank, it would pay part of its current obligations for the last quarter of the year.See: "Clutching at Straws" in Costa Rica".
Contrary to what happened in previous weeks, in the last few days it has not been necessary for the Central Bank to intervene in the wholesale market by selling dollars.
In the Monex wholesale market the exchange rate closed last week at ¢572.90; While this Friday, June 15, it was around ¢570,70.
See the behavior of the exchange rate in the graph[GRAPHIC caption = "Click to interact with the graph"]
In an unstable exchange market, lack of transparency in the rules on intervention by the Central Bank of Costa Rica increases uncertainty and drives investors towards the safest currency.
EDITORIAL
The rise in the price of the dollar in Costa Rica is a negative factor for some sectors and positive for others, but generally negative for the economy, because it distorts companies' plans, diminishing their competitiveness, and because it increases market players' willingness to speculate.
In one day the Central Bank sold $30 million on the wholesale foreign exchange market in order to moderate the upward trend that had been seen in the price of the dollar against the Colon.
The transaction was made in order to prevent sharp fluctuations in the exchange rate, which since the beginning of the year has shown an upward trend in the wholesale Monex market.On Thursday, March 23, alone the Central bank sold $30.9 million, the highest figure of the year.
Costa Rica's export sector wants to regain competitiveness through devaluation of the colon, but the Central Bank insists that the exchange rate is at the right level.
An article in Nacion.com reports on the pressure put on authorities at the Central Bank (BCCR) by exporters, to devalue the local currency which would increase the competitiveness of Costa Rican exports, which in the past year fell by one billion dollars.
The Central Bank of Costa Rica has officially eliminated the exchange rate band which has been in place since 2006, and let the exchange rate float, reserving the right to "participate in the market to prevent violent fluctuations".
From a statement issued by the Central Bank of Costa Rica (BCCR):
The Board of the Central Bank of Costa Rica (BCCR) set out in Article 5 of the session 5300-2006, October 13, 2006, establishing a system for an exchange rate band with effect from October 17, 2006. The scheme was announced as part of the process of a gradual and orderly move to a floating system, a condition for improving the monetary control of inflation.
Over three consecutive days the central bank injected $39.4 million into the wholesale foreign exchange market in order to control the rise of the dollar against the local currency.
The U.S. dollar was quoted on Thursday May 29 at 559 colones in the Monex wholesale market, which is above the average value of 555.6 colones per dollar recorded on Wednesday 28 May.